CFPB Appraisal Disclosure Rule Takes Its Toll
The Consumer Financial Protection Bureau's new notification requirements for property valuations have rekindled old industry debates over appraisal alternatives and are expected to add costs along with yet another layer of mortgage litigation risk.
Since Jan. 18, the CFPB's amendment to Regulation B hasrequired lenders to send loan applicants free copies of "all written property valuations" created to support a mortgage credit application. That includes appraisals, automated valuation models and broker price opinions.
Full appraisal reports are seen as a must in supporting mortgage loan originations, refinancing, short sale, foreclosure or other life-of-the-loan milestones. However, lenders routinely make property valuations using alternative methods to fill the information gap when a current full appraisal that is more expensive and takes longer processing time is not immediately available.
“Regulation B has created a bit of an administrative nightmare for lenders who must figure out how to deliver AVM reports to the consumer, explain their contents, and prove it was received," says John Walsh, the president of DataQuick, a provider of real estate and mortgage data, analytics and software.
Regulatory pressures and accuracy concerns may tempt lenders "to stop using AVMs altogether to avoid the hassle of providing reports," Walsh says, and risk missing out on the "valuable property valuation intelligence" AVMs provide between appraisals.
An example of such intelligence: Lenders and appraisal management companies may run an AVM just to see "if the deal has legs at all," with no intention of using it as the final valuation, says Molly Dowdy, an executive vice president of marketing at Naples, Fla., appraisal software firm a la mode.
While useful, the alternative tools are no substitute for a full appraisal, Dowdy says. "There’s a long history of inaccuracy with BPOs and AVMs, so when those come through there’s no real accountability for the accuracy."
For years, appraisers have warned as much.
"Appraisals are more robust products than AVMs or BPOs, which aren’t intended to, or capable of, serving the same purpose as an appraisal," says Ken Wilson, the 2014 president of the Appraisal Institute. Consumers are always better served by reliable opinions of value provided by qualified, licensed appraisers, he says.
Tom Goyda, a spokesman for Wells Fargo, says the bank has not "substantially changed" the use of AVMs as a result of recent regulatory changes.
"While most of Wells Fargo’s mortgage originations are made with a full appraisal, we continue to use AVMs for some property valuations and to supplement our use of appraisals."
The bank sends hard copies of all valuations to customers, but "I can't comment on anything related to electronic transmission of AVMs."
Regulation B is expected to bring about additionalunintended consequences.
Lenders and servicers are now looking for alternative tools that help assess property values, "without an actual valuation figure that must be sent to the credit applicant,” according to Walsh.
Hence DataQuick is offering alternative data support to lenders trying to comply with the new CFPB requirement. It has updated its online property intelligence portal, PropertyFinder 2G, so users can customize comparable sales data and analysis to accurately assess the property without generating a valuation estimate subject to the notification requirement.
Dowdy points out another issue that is easy for lenders to miss, because it applies only to electronic notifications.
The E-Sign Act of 2000 says companies may deliver notifications to consumers electronically only if they "have proof that the borrower can access and view" the file. Without such proof, the notification must be sent by regular mail. So to comply with the new CFPB rules, lenders must send a dated and time-stamped electronic notification to the borrower of their intent to deliver a valuation, and they must document the borrower's acknowledgement they can receive electronic files.
"We just started getting a flood of calls and emails" from lenders and others who worry the platforms they use to deliver notifications to borrowers cannot handle the acknowledgment requirement, making them potentially liable, Dowdy says.
Alice Sorenson, the chief investment officer of LRES,a real estate finance software solutions provider based in Orange, Calif., says some of her bank clients "are definitely relying more on appraisals than they are on the other valuation tools" as a result of the new rules. "Bankers are more conservative in their business practices and are more comfortable getting the valuations from licensed appraisers."
The challenge with these different types of property valuation methods, in addition to accuracy, is using the right tool for the right job, she says. "I've always maintained that appraisals are what lenders need, BPOs are what sellers and brokers need, and AVMs and other sources of electronic data are what the secondary market needs," Sorenson says. Each of those products "will find the most traction" in its respective field, maybe not in the short run, but in the long run.
Sorenson disputes the validity of the new notification requirement from both the lender and the customer perspective, especially given the cost that has resulted.
While more reliable and more accurate than AVMs and BPOs, appraisals also are more expensive. Even electronic valuation data transmission costs can be significant because cost depends on scale.
Over the last two years, in anticipation of the rule, most lenders have spent large amounts of money to make internal changes to their processes to comply, Sorenson says. "It has been a huge cost incurred to date."
Whether it is an appraisal or an AVM, "there is a cost to valuation compliance." If delivered electronically, it includes the cost of setting up systems, sending a notification and then documenting the borrower's acknowledgement. Snail mail also costs money.
Sorenson finds that lenders are willing to send these pre-notifications if they can recover associated costs through higher product pricing.
With the electronic delivery costs, "the heavy lifting" is a one-time expense of several thousands of dollars in setting up the technology and processes. Most lenders have already done this, she says. Afterwards they charge cents on the dollar for each electronic delivery and about $5 per loan on snail mail that includes postage and clerical work. It may not seem much but builds up and becomes "a big deal for some organizations," she says. For a typical mortgage banker that generates an average of 2,000 loans a month, "it is a lot of money."
In Dowdy's view, even if at roughly 50 cents per electronic send on dated and time-stamped notifications and proof of borrower acknowledgement, direct transmission charges may be unsubstantial, additional costs may accrue if lenders add consumer education to other compliance related measures.
The CFPB is trying in earnest to make this work for customers and lenders, but now that lenders are in the implementation stage of the regulations, "we're learning how they're working and what the unintended consequences are on the borrowers," Sorenson says.
Sorenson, a veteran appraiser who happens to also be in the process of getting a home equity line of credit, says she recently received in the mail a package from Wells Fargo that included a copy of the notification documents and the AVM used on her house.
"I'm not exaggerating when I say that I threw it on my desk, but did not even pull the documents out. And it would mean something to me if I read it, but the common U.S. citizen I do not think would read it or understand it. I don't know that a typical borrower is savvy enough to look at a valuation and know if it's right or wrong. And that makes me question the cost benefits of this rule, which probably are not there."
Lenders use valuations to make loan decisions so it is right to provide the standard appraisal document to the borrower, but the new requirements are overkill, Sorenson argues. "Why should the lender be burdened with providing this information that will be living in the file for the life of the loan anyway?"
Decades ago, appraisals were typically transportable. An appraiser would go to the house to make an appraisal and the consumer would take that single appraisal and shop around to find a lender.
Gradually, this practice became less common and now it is no longer an option because of the way the CFPB structured the valuation rules, Sorenson says. An appraisal "is no longer transportable," forcing all borrowers to pay for the appraisal each time they shop for a mortgage with a different lender.
"It is one of the unintended consequences. I do not think Congress want the customer to pay more. In their zeal to protect the customer they have set the customer up for additional costs."
Kate Berry contributed to this story.